No dividend = bad stock ?
A friend once told me never to buy a stock which does not have dividend payout. He told me after I told him I sold Air Asia at a loss of RM 500. According to him, a stock which does not pay or has very very low dividend payout is a bad stock and should not be bought.
How true is this?
Apparently, it’s not very true. A defensive stock will give you a decent dividend payout and it is a good option during unstable time such as the recession period we’re having now. However, some defensive stocks can be quite pricey because who doesn’t want to have a stock which pays good dividend? In fact, a lot of people want to have these defensive stocks. Thus, they are normally very expensive due to the high demand…maybe more expensive than its actual value.
On the other hand, stocks which do not pay dividend cannot really be considered as lousy stocks. Some of them have a lot of cash and prefer to use the cash to expand or improvise the business, rather than distributing the extra cash out to shareholders in the form of dividend payout. Warren Buffett’s company Berkshire Hathaway does not have dividend payout. The company prefers to take the extra money, pump it into the Shareholders’ equity. From there, the fund will be used to further strengthen the company’s position in the industry. Same goes for local companies such as Resorts.
And if you notice, this theory does not apply to stock market only. Mutual funds are applicable too. Funds which do not distribute dividend normally use the earnings to further improve their portfolio. This sounds a bit like compounded interest…but not that good, of course. Otherwise, all of us will be super rich by now.
Conclusion, I can strongly say that a stock which does not pay dividend, or has low dividend payout, is not necessarily a bad stock. A stock which does not use its money wisely IS a bad stock (has a depleting shareholders’ equity aka war chest).
At the end of the day, it depends on you, the investor, to choose what kind of stocks you want to invest in – either defensive or not because I believe as long as the company knows how to use the money wisely and has steady earnings…then it is not a bad stock.
Just my 2 cents. Hope it helps.
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Comments
@ Damien
That’s what most people would do. Also, it depends whether you’re a long term investor or a short term one. If you’re looking for short term investing, investing in defensive stocks including those which are undervalued, might not be suitable. Companies which give good dividends tend to be slower in growth.
So, it really depends on your preferences in stock selection. As for penny stocks, there are reasons why these stocks have been priced in this way – maybe due to panic, or maybe the fundamentals are not strong enough to give a proper earning forecast.
One school of thought recommends you to buy stocks with high dividend payouts during a recession. That’s reputable stocks that fall into the penny stock category, defined as US5.00 or less in Wall Street. Many big counters like GM has become penny stocks in the last few months.
The reason is that these stock prices don’t reflect true value but they make enough operating profit to give out good dividends. So basically they pay you to wait until the markets normalize.
That is what I would do in a bear market like this one.